On June 4, the House of Representatives and the Senate approved legislation that substantially reshapes New Hampshire’s Medicaid Enhancement Tax (MET) and the distribution of the revenue it is expected to yield. While the measure offers a greater level of support to hospitals throughout the Granite State, it also opens a sizable hole in the FY 2016-2017 state budget.

The legislation (SB 369) requires New Hampshire to provide “disproportionate share” (DSH) payments to critical and noncritical access hospitals across the state. These are payments made with combined state and federal funds to reimburse hospitals for the costs of caring for those who can’t pay for their health care and to make up for Medicaid’s low reimbursement rates, also known as uncompensated care costs.

In fiscal years 2016 and 2017, critical access hospitals – small rural hospitals with no more than 25 beds – will be reimbursed 75 percent of their uncompensated care costs. Non-critical access hospitals will receive 50 percent of their individual uncompensated care costs. Under the legislation, these payments from the state to the hospitals will be capped at a total of $224 million. Moreover, the rate for the MET, which generates the funds needed to make these payments, will be lowered to 5.45 percent in 2016 and 5.4 percent in 2017.

In fiscal years 2018 and 2019, critical access hospitals will continue to receive 75 percent of their uncompensated care costs. Other acute care hospitals will receive 55 percent of their uncompensated care costs. The cap on such payments will rise to $241 million during this period. The tax rate for the MET will remain at 5.4 percent in 2018 and beyond, unless total statewide hospital uncompensated care costs fall below $375 million, in which case the rate will permanently drop to 5.25 percent. This seems likely given that total uncompensated care costs in recent years have been in the range of $320 million to $350 million per year.

Payments to hospitals will be contingent on MET revenues reaching agreed upon estimates. If revenues fall short of the estimates, state payments to the DSH pool for noncritical access hospitals will be reduced.

Assuming collections meet their goals, the state’s hospitals could receive as much as $175 million per year over the next four years in DSH payments. However, no hospital will be paid a DSH payment that exceeds 100 percent of its uncompensated care costs.

The passage of SB 369 settles most, but not all, of the outstanding legal challenges by hospitals against the state, including those related to Medicaid rate reductions, refunds on their FY 2014 and FY 2015 MET payments, and the constitutional challenges to the construction and application of the MET. If future legislatures choose to reduce DSH funding, the hospitals retain the right to re-open their litigation and the state retains all of its defenses. St. Joseph’s Hospital chose not to participate in the settlement and will remain the sole litigant.

SB 369 makes other changes to the MET and the uses to which it is put, including:

Exempting rehabilitation hospitals from the MET;

Moving the MET tax payment date to April 15 in each fiscal year;

Moving the DSH payments to May 31 in each fiscal year;

Accelerating the MET taxable period by one year;

Requiring each hospital to submit a non-binding estimate of its projected tax payment in January, and;

Eliminating the direct transfer of the MET to the General Fund.

This last change is significant. The MET has traditionally contributed between $70 million to $100 million to the General Fund each fiscal year. SB 369 strikes provisions in current law directing a portion of the MET to the General Fund, but allows some MET funds to support Medicaid program costs. As a result, SB 369 will reduce the amount of revenue flowing into the General Fund by anywhere from $55 million to $100 million in the FY 2016-2017 biennium and by as much as $87 million in the FY 2018-2019 period.

In other words, the next budget already faces a hole of as much as $100 million. To put that in perspective, that is a gap roughly equal in size to funding for the Departments of Environmental Services, Resources and Economic Development, and Revenue Administration combined. As policymakers left Concord without identifying a means of filling this gap, that task will be one of several major fiscal challenges awaiting the members of the 2015 legislature.

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